Free trade, protectionism and the TPP

The Trans‐Pacific Partnership has again been in the news, this time because initially President Obama was unable to get Congress to give him authority to fast track negotiations because of a revolt within his own party. He overcame that difficulty in the House of Representatives (which had initially rejected it) and then got approval from the Senate.

As I understand it, the aim of the law is to enable the President to conclude negotiations and to put the agreed outcome to Congress for a Yes or No vote (to avoid the horse trading that US Congressmen engage in).Some of the broadcast excerpts from speeches by Congressman opposing the ‘fast track’ legislation have been a disgrace to a country which once prided itself on being the land of the free because they put protectionism and the perceived interests of the unions and other pressure groups ahead of free trade. It is ironic that the US is now more unfree and less capitalistic than many other countries and in particular New Zealand, whereas if we go back to the days of Muldoon’s fortress New Zealand economy the reverse was very much the case.

In the early days of civilisation when markets started to develop people from tribal groups would venture out to seek goods which were unavailable to them but others had. Trade developed with goods being exchanged for goods and over time with money being developed to serve as a medium of exchange to facilitate trading activity. In an unhampered global market economy, anyone could trade with anyone else irrespective of where they both lived and their terms of trade would be the agreement they made.

But in due course rulers started to interfere with trade when they saw the opportunity of raking off something for themselves. In cross border trade this included customs duties (hence smuggling to avoid the duties). Then they thought they could make their own country wealthier by protectionism

— impeding imports by tariffs and preventing imports by prohibitions, licensing and quotas. This led to retaliation. Over time tariffs and quotas and subsidies developed as rulers sought to protect their own patches. With the advent of election of rulers (democracy), governments set about seeking to

protect parts of their economies in the complex of bribery and corruption brought about by pandering to the popular vote, special interest groups and to those who owe allegiance to governments and vice versa. These measures were justified by spurious arguments as to the purported beneficial nature of such policies.

In relatively recent decades it has come to be realised by some that the purported benefits are illusory, that restrictions on free trade are harmful to consumers and producers alike and that they are of benefit to no one save narrow interest groups who seek to gain at the expense of others by utilising the coercive powers of government to promote their own ends. At best such measures may confer a temporary advantage to some parts of an economy but others end up paying the price.

Cross‐border, benefits to particular countries are short‐lived before adjustments are made within others to ratchet up protection to counteract the short‐lived benefit. Overall such measures are detrimental to the interests of the citizens of all countries as production and productivity are harmed and consumers pay the price. The realisation that the purported benefits are illusory has led to attempts to dismantle the restrictions and restore free trade. Globally, the World Trade Organisation (WTO) has as a primary object: “Lowering trade barriers is one of the most obvious ways of encouraging trade; these barriers include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.”1

The WTO’s processes are cumbersome and hampered by the necessity to get agreement of members — which means, agreement of virtually all countries. So we see, for example, India’s insistence on maintaining agricultural protection impeding agreement. In frustration at the lack of WTO progress, countries whose governments have come to believe in the benefits of free trade have taken matters into their own hands. They have sought to do this incrementally by bilateral trade agreements, usually known as free trade agreements (FTAs). Sometimes what is attempted is a multilateral FTA. Such is the Trans‐Pacific Partnership (TPP) which was originally entered into by four members of the Asia Pacific Economic Cooperation (APEC). (To accommodate China’s sensitivity in relation to Taiwan and Hong Kong when APEC was formed in 1989 the member countries were referred to as economies, rather than countries). It is not coincidental that four members of APEC formed the TPP because APEC’s objectives are the promotion of free trade and investment even though many members have dragged their feet and have paid lip service to the objectives at best.

APEC has 21 members who are countries on the Pacific rim. Its current mission statement says “We are united in our drive to build a dynamic and harmonious Asia‐Pacific community by championing free and open trade and investment, promoting and accelerating regional economic integration, encouraging economic and technical cooperation, enhancing human security, and facilitating a favorable and sustainable business environment. Our initiatives turn policy goals into concrete results and agreements into tangible benefits”2. APEC has been a driving force to make the Asia‐Pacific region the standout economic performer of the global economy.

The TPP was initiated by New Zealand, Singapore and Chile in discussion at the APEC Leaders’ Summit in Mexico in 2002. Before the negotiations concluded, Brunei joined the three initiators – so there were four signatories to the agreement. It was then called the Trans‐Pacific Strategic

Economic Partnership and a link to the agreement itself is given in the footnote below3. The TPP was signed in June 2005 and entered into force in 2006. It is 160 pages long so it is impossible to do other than highlight the aspects which are important for this article.

Article 1.1, clause 3 of the agreement provides that “The Parties seek to support the wider liberalisation process in APEC consistent with its goals of free and open trade and investment”.

Clause 4 contains objectives including “(b) eliminate barriers to trade in, and facilitate the crossborder movement of, goods and services among the territories of the Parties”. Article 1.2 is headed Establishment of the Free Trade Area and provides that the Parties “hereby establish a free trade area” in consistency with provisions of WTO agreements.

Article 3.4 provides for the elimination of customs duties imposed by the respective parties. Customs duty is defined in Article 2.1 to include any duty or charges of any kind imposed in connection with the importation of a good, but with some exceptions. Article 3.8 — clause 1, prevents the parties from introducing or maintaining any non‐tariff measures on the importation of any good of another Party or on the exportation of any good destined for the territory of another Party, except in accordance with WTO provisions or any specific provision in the TPP. With an exception, export duties are prohibited: Article 3.10. Article 3.11 agrees to the elimination of export subsidies for agricultural goods.

Article 20.6 is of crucial significance in relation to the current position. It provides that the agreement is open to accession on terms to be agreed among the Parties by any APEC economy or other State. It provides further that the terms of such accession shall take into account the circumstances of the APEC economy or other State, “in particular with respect to timetables for liberalisation”. Article 20.6 is consistent with the last item in the Preamble at the beginning of the agreement which in stating the objectives of the agreement provides: “PROMOTE common frameworks within the Asia‐Pacific region, and affirm their [i.e., the Parties’] commitment to encourage the accession to this Agreement by other economies”.

It is important to note that the TPP is in force and has been since it was signed in 2006. Its terms bind the parties to it — New Zealand, Singapore, Chile and Brunei. No other country will be bound to it unless it accedes to the agreement.

In 2008, the US indicated it was going to enter into negotiations to accede to the TPP. This was under President Bush but by the end of 2009 President Obama had endorsed the initiative and negotiations commenced. A number of other countries followed suit. 12 are now in negotiation.

Obviously with such a large number of countries the negotiations are difficult and have been protracted. Each country will be seeking terms of accession which suit it. But the overall objectives are those contained in the existing TPP as agreed to by the four original parties. At this time, that 2005 agreement is the only agreement. If the parties currently negotiating are able to reach agreement there will be a new agreement replacing the original one but at the moment the existing agreement is the one containing the provisions referred to above.

Until those negotiations are concluded and a new agreement signed the terms of the new agreement are unknown, although there have been leaks of texts said to have been put forward as drafts for consideration.

As can be seen from the above description the existing (2005) TPP agreement provides for unhampered cross‐border trade between the Parties, with only minor qualifications. Although the

TPP involves only four relatively small countries, any steps taken to roll back restrictions on trade and investment are steps in the right direction. If larger economies accede to the agreement without fundamental departure from the principles embodied in the existing agreement the prize for all participants will be much bigger.

The principles of free trade embodied in the existing agreement may be eroded away by each country wanting its own exceptions or additional provisions which run counter to those principles. It would be better to hold the line and wait them out than to sign up to a substandard agreement under time pressure. Brunei, Chile, New Zealand and Singapore should stick together on this and refuse to accept any departure from those principles. After all, the status quo is the existing agreement which cannot be amended without the agreement of those who are already the parties to it. If they don’t agree and the other countries still wish to proceed to make an agreement, they would have to start from scratch.

Article 20.6 of the existing agreement recognises that particular circumstances of other economies and States are to be taken into account, particularly with regard to the timetable for liberalisation. That’s fair enough because particular circumstances in a particular country may make it necessary for the timetable to be longer. But it is essential for the commitment to freedom to be made and given unequivocably without compromise other than in relation to timing. That is plainly intended by Article 20.6 in the context of the agreement as a whole. Article 20.6 envisages only minor departures and in the main with regard to the timetable. Anything beyond that would mean not amendment to the existing agreement but the discarding of it and replacement by a completely new one. Surely Brunei, Chile, New Zealand and Singapore would not want to jettison the grand vision shown by the existing agreement and replace it with a tawdry half baked substitute.